I have been dialoguing with a reader who recently inherited 2,000 shares of Altria and 2,000 shares of Philip Morris International after her dad’s passing. Alongside the inheritance, she received the instruction from her dad, “Don’t sell either stock for the rest of your life.” The legality of the question isn’t worth exploring; courts generally don’t pay mind to the continuance of investments after they are distributed post-death, with the possible exception that some jurisdictions permit restrictions on selling ancestral family homes that have clear sentimental value and are intended for the use of multiple beneficiaries.
Of course, the social and psychological issue is much more fun to explore, anyway. The question I’d want to answer is this: Why do you think your dad gave you this instruction?
Without knowing much about your dad, I would hazard a guess that these two psychological forces are at play:
My first thought is this: when a stock is successful for a long enough time, it starts to take on a security blanket kind of appeal. Your dad has owned the best stock he could have purchased in the 20th century. Nothing comes close to Altria’s 17% annual returns from the 1920s until the 2000s, and if you held the stock for longer than ten years—it doesn’t matter whether it was fifteen, twenty, or twenty-five years—he has trounced the S&P 500. When an asset takes care of you like that, why would you ever let it go?
The other reason why he probably gave you that warning? Cash flow. Once someone gets automatic cash flow as a meaningful component of their life story, it becomes addicting. You never want to let it go.
Have you heard the stories of what it was like in Winston, Salem, the headquarters of RJ Reynolds, during the heyday of the domestic tobacco industry?
In the 1920s, R.J. Reynolds created a Class A stock—known locally as anticipation stock—designed to put all voting power in the hands of the workers. It paid an extraordinary rich dividend: 10% of all profits in excess of $2.2 MM. Workers clamored for the new issue, and many used their salaries to buy all the Class A they could. The annual dividend payment became a kind of local holiday, a time local car dealers and luxury purveyors eagerly awaited. The story was told of a Winston Salem tyke who received a horde of presents on Christmas morning, only to begin weeping uncontrollably. He said he’d had his heart set on Class A stock.
What triggers the brain to cause a child to cry when he doesn’t receive Class A Reynolds stock as a Christmas present? At the other side of life, what triggered your dad to say “don’t sell the Altria or Philip Morris” stock as his final economic instruction to you?
It’s about the realization that your daily life is lived through the amount of cash you have in your bank account to pay for things, and investments that don’t pay dividends can only make you richer when you relinquish your ownership stake at a higher price. A cash-generating asset, meanwhile, has a much greater contributory effect as you go through life: it aids your cash flow every ninety days, and if you choose well, by a greater amount each year.
Let’s not even talk about Altria and Philip Morris International’s stock price. Let’s just discuss what they do as an ongoing matter for their owners. For most of 2014, Altria was paying $0.48 quarterly. Those 2,000 shares were yielding $3,840 per year. Those 2,000 shares of Philip Morris International typically were paying out a $0.94 quarterly dividend, giving you $7,520 in annual income.
Combined, those Altria and Philip Morris International shares have been averaging $11,360 in cash per year. That is $946 per month—I have no idea what your dad’s financial situation was like, but let’s pretend that was the “average American household” in that he brought in $53,000 per year, or $4,400 per month. That extra $900+ plus per month was a godsend. Because of his business ownership interests in Altria, he could have chosen live a spending life 15-25% above what he was earning just by selling his time for labor. That $900 per month is a permanent way to buy extra groceries, make the mortgage payment a little easier, or automatically build up a savings fund in a rainy day kind of spirit.
When people find themselves owning income-producing assets for a long time—it could be AT&T, ConocoPhillips, GlaxoSmithKline, BP, Royal Dutch Shell—there are a fair amount of them out there if you know where to look, they can see the immediate benefits of ownership in making life easier. They don’t have to sell the stock to benefit. They don’t have to stare at a stock screen all day praying it will go up so they can sell it and spend the proceeds on something in a one-time, never-again-to-be-repeated kind of way.
When your dad told you to never the sell the stock, it was likely him looking out for your long-term interests, rather than your immediate interests. Sometimes, when people get their hands on money, especially that they did not earn as a result of their own labor, they take the cash and spend it. A car gets bought, a vacation gets made, whatever. That decisionmaking is not wrong. It’s not evil. But it also does not make things easier for the future version of yourself decades down the line. When someone is trying to tell you to keep your hands on an income producing asset, they are trying to give you a gift that you will benefit from in 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, and so on.
Originally posted 2014-10-31 08:00:34.